Connecting decision makers to a dynamic network of information, people and ideas, Bloomberg quickly and accurately delivers business and financial information, news and insight around the world.
+1 212 318 2000
Europe, Middle East, & Africa
+44 20 7330 7500
+65 6212 1000
Amid the explosion of consumer interest in all things ecological, elected officials are rushing to promote environmentally friendly policies. In his State of the Union speech, President George W. Bush announced his proposal to cut U.S. gasoline consumption by a fifth over the next 10 years, with a major boost in ethanol and other alternative fuels.
But before the proposal gets cheered into law, it requires further scrutiny. The reality remains that ethanol is no magic potion for meaningfully reducing oil dependence and lowering greenhouse gases. The prospect of boosting ethanol production to 35 billion barrels by 2017 will require massive tax subsidies and produce such environmental damage that the plan can be considered little more than a dream.
One problem with ethanol is its cost. It’s subsidized by the U.S. government at a rate of 51 cents per gallon, and federal and state subsidies for the fuel added up to $6 billion last year. As the number of gallons produced multiplies, so will the cost to the taxpayer.
Taxes aren’t the only burden that will fall on consumers. As ethanol usurps more of the corn crop, the price of corn rises, boosting food prices. Already, about 20% of the corn crop goes toward ethanol production, up from just 3% five years ago. That drove up corn prices 80% in 2006 alone. This week, Richard Bond, the chief executive of meat producer Tyson Foods TSN, warned that if corn continues to be diverted from animal feed, consumers will likely pay “significantly” more for food.
But even if ethanol costs a lot, doesn’t it at least benefit the environment? Not necessarily. Because it’s an oxygenate, ethanol increases levels of nitrous oxides in the atmosphere and causes smog. Researchers are debating the extent to which it reduces greenhouse gases, with some estimates as low as 5%. Also, ethanol lags gasoline in fuel efficiency, and it requires fossil fuels like coal or gas to refine and transport it.
Ethanol’s supporters say that not all ethanol will come from corn crops, and point to the great promise of “cellulosic” ethanol—made from nonfood crops like corn chips and wheatgrass. But the great hope of cellulosic is dampened by a gaping hole in the technology: The enzyme that will convert these plants to starch, and thus ethanol, has yet to be discovered.
So what’s the alternative to Big Corn? If the government is serious about finding cost-effective and environmentally sound alternatives to oil, it will need to invest more in research for cellulosic ethanol, as well as for wind and solar energies. Of course, the other alternative—less costly but surely not as popular—is conservation. That word was noticeably absent from the State of the Union speech.
Ethanol enjoys its favored status because it constitutes the only real option the U.S. has to disrupt what President Bush terms our addiction to foreign oil. A congress of science and economics hasn’t yet managed to generate other viable technologies to power our vehicles—and a shift toward greater use of alternative fuels is clearly necessary. As a nation, we use three times more of the worldwide oil output each year than the next-largest consumer does, and we contribute far more than our share of global carbon emissions. That makes Bush’s call for 35 billion gallons of alternative fuels over the next decade practically a mandate for our role as responsible global citizens.
Additionally, the ethanol industry plays a crucial role for the U.S. Farm Belt. Higher corn prices are helping to recharge economically depressed rural economies, and new ethanol plants bring decent-paying jobs to areas that have suffered chronic underemployment (see BusinessWeek.com, 01/10/07, “Who Profits from Corn’s Pop?”). The 5.3 billion gallons of ethanol used last year consumed only 20% of the nation’s corn crop. Meeting Bush’s goal would still require less than half of the entire corn crop—and that’s only if no new corn production is added.
Moreover, the U.S.’s vital agriculture economy depends heavily on healthy corn prices for farmers, and the current cost of around $4 per bushel is manageable for the economy. The genius of free-market capitalism will sort out what needs to happen as corn prices mature and other corn-dependent industries compete for the feedstock. Ethanol also could become much cheaper than it is now, roughly in line with unleaded gasoline, if Washington ends tariffs on imported ethanol. That tariff, 54 cents a gallon, distorts ethanol’s real cost and slows its U.S. expansion.
Archer Daniels Midland ADM, VeraSun Energy VSE, and other ethanol producers are spending heavily to research feed materials beyond corn, “cellulosic ethanol” (produced from cornstalks, sorghum, wood chips, and switchgrass), and the like. These efforts would render moot worries that greater corn use will adversely affect the overall economy. Regardless of feed source, ethanol has proved a viable industry, as seen by Brazil’s dramatic success in converting its fuel systems to the fuel.
Please send us your ideas for new Debate Room topics. If you're an academic, association officer, or other industry expert and would like to write a Debate Room essay, send us a query. Questions? See the